The Effect of the European Union Customs Union on the Balance of Trade in Turkey

This article investigates the effect of the customs union between Turkey and the European Union on the balance of trade in Turkey. The framework for analysis is an extended trade gravity model onto which the impact of the customs union is applied. The gravity model of trade is estimated using dynamic panel data which applies the generalized method of moments to a sample of OECD countries. Separate estimates were made for the periods before and after the process of trade liberalization in Turkey—1980–1995 and 1996–2012, respectively—as well as for the full period—1980–2012. The main conclusion is that when the European Union is accounted for as an econometric variable, the empirical results are striking: Turkey’s gains resulting from taking part in the customs union are noteworthy, with significant improvement in the trade balance with European Union countries. However, the trade flows, and specifically imports, have been mainly with OECD countries that are themselves not members of the EU. The model indicates that external common tariffs are responsible for Turkey’s trade growth rather than tariffs abolished in the internal market of the customs union.